U.S. and China Take Small Steps on Trade

By CHRIS BUCKLEY

Published: June 25, 2004

BEIJING, June 24—
After nearly a week of prickly discussions on trade, China and the United States agreed to meet twice a year with the aim of eventually granting China the status of a market economy.

Donald L. Evans, the commerce secretary, ended a six-day visit to China on Thursday. Mr. Evans and Elaine L. Chao, the labor secretary, who was also in Beijing, pressed China to make trade-related changes including loosening its currency controls, privatizing its banking system, strengthening workers' wages and bargaining rights, and rolling back the role of government in the economy.

''Far too many key assets and means of production within the Chinese economy are owned and operated by the state,'' Mr. Evans said this week in a speech to the American Chamber of Commerce in Beijing. ''We have seen too few 'for sale' signs on the commanding heights of the Chinese economy.''

Trade officials and lawyers said that reclassifying China as a market economy would make it easier for Chinese companies to fend off dumping charges, but they stressed that it might be many years before China reaches the necessary conditions.

''There's no doubt they're committed to reforms that bring China closer to a truly market economy,'' said Grant D. Aldonas, the Commerce Department's under secretary of international trade, in an interview in Beijing, ''but it will take some considerable time.''

A senior American trade official will travel to Beijing in July to start the talks, he added.

The United States is China's biggest export market and the United States' trade deficit with China hit $124 billion last year. That trade gap has drawn growing trade complaints from American manufacturers and unions.

China is currently classified as a ''nonmarket economy'' under American trade rules, which makes it vulnerable to complaints from the United States of selling goods like furniture, clothes and televisions at below-market prices.

''If an economy is not a market economy, then the U.S. no longer uses exporters' home market as the normal price for goods,'' said Patrick Norton, a trade lawyer with O'Melveny & Myers in Beijing. China is usually assessed in American antidumping cases by using surrogate prices from India, which is classified as a market economy.

''That leads to some very strange and unpredictable results,'' Mr. Norton said.

The far-reaching changes China will have to undergo to meet these criteria include removing the government's influence over commercial bank loans, which often go to failing state-owned companies, and allowing currency convertibility on current and capital account transactions.

China now allows relatively free currency conversion for current account transactions, which primarily deal with traded goods, but it maintains strict controls over the inward and outward flows of capital accounts -- money used for investment.

''What we're concerned with is the free flow of capital, not the precise exchange rate,'' Mr. Aldonas said. ''This is about the pace of reform.''

The United States also hinted that it might encourage China's steps to full market status by using revised rules in a case against Chinese wooden furniture makers.

Last week, the United States imposed duties worth $1.2 billion on Chinese wooden furniture exports after complaints from American manufacturers and trade unions. Although China's wooden furniture industry is overwhelmingly privately owned, China's nonmarket status makes it difficult for private manufacturers to prove that their cheap prices are a result of market competition, not government manipulation.

United States trade officials, however, may consider classifying China's private furniture makers as a ''market-oriented sector,'' thus sparing them many possible sanctions imposed on government-owned makers, Mr. Aldonas said.

When China joined the World Trade Organization in 2001, it agreed that the United States did not have to reconsider China's nonmarket status until 2015. Other countries, including New Zealand and Thailand, have recently given China market status; the European Union is also considering making the switch.

But as a market economy, China would be exposed to antidumping charges brought because of unlawful financial subsidies, rather than distorted prices, Mr. Norton, the trade lawyer said.

''You can't bring an antisubsidy case against a nonmarket economy,'' he said. ''It's going to be out of the frying pan and into the fire.''

During discussions with Mr. Evans, top Chinese trade officials also repeated their interest in buying American-developed nuclear power technology and pressed their American counterparts for assurances that a potential deal would not be derailed by political disputes or security concerns.

''They were very interested in the nuclear issue. They want the latest technology, but they are also afraid of light-switch diplomacy,'' said Mr. Aldonas, referring to the risk of a sudden suspension of any deal. Chinese trade officials warned that any reversals of agreements would endanger cooperation in the nuclear power field, Mr. Aldonas added.

China's chief trade negotiator, Vice Premier Wu Yi, cited a Chinese proverb, ''Once bitten by a snake, one is terrified of the mere sight of a piece of rope,'' Mr. Aldonas said, adding that Washington would seek to develop a set of measures to address Chinese concerns.

The Westinghouse Corporation, which is based in Pittsburgh, has lobbied China to buy its latest model AP1000 reactor, but French and Russian companies are also vying for contracts under a Chinese plan to substantially expand the use of nuclear energy.

Mr. Evans and senior Chinese officials also discussed arrangements for inspection visits to ensure technology exports with potential military applications are not diverted from agreed civilian uses.

Mr. Evans said he was satisfied with Chinese efforts to further protect the copyrights of American investors in China but added that ''there is much work to be done.''

In trade talks in April, China agreed to strengthen criminal punishment of sellers of pirated goods, and to open a nationwide campaign against unlicensed computer software and other forms of piracy.

Photo: Donald L. Evans, the commerce secretary, during a visit this week to China, pressed the government to make trade-related changes to its economy. An American trade official will travel to Beijing in July for more talks. (Photo by Associated Press)